Tangelo’s submission for CP 332 - Promoting access to affordable advice for consumers

Tangelo has made a submission to this ASIC consultation. Working across the industry, on behalf of a variety of clients, we have strong views on what should be done to make high quality advice available to all Australians who need it.

In summary - here is what we think

Inhibitors to providing good quality limited advice

• Lack of clarity from regulatory bodies

• Inconsistency between legislative requirements and FASEA Code of Ethics, for example:

  • Conflicts

  • Standards 2, 5 and 6 in relation to limiting scope

• Current examples in RG 244 are not realistic/relevant

• There has not been enough industry engagement

• Increased cost to serve

  • Additional processes and rules put in place by licensees (due to lack of clarity).

What needs to change

• More clarity from Regulator

• Consistency between ASIC and FASEA

• Industry engagement, e.g. working groups

• Examples of practical application of requirements

• Improve consumer perception

• Single Disciplinary Body (SDB) to be the “source of all truth” and centralize guidance, with one set of policies and guidelines

• Limited advice SOA examples

• Guidance on Strategic advice.

Tangelo’s submission in full

QUESTIONS FOR OTHER STAKEHOLDERS (TABLE 3)

B1Q5 Questions about you

(a) Please tell us about yourself and your interest in the issue of promoting access to good-quality limited advice

Tangelo Strategy & Advice Consulting was founded in 2019 by Selin Ertac and Conrad Travers, with the objective of a hybrid model of consulting with a focus on expertise and practical solutions across people, policy, process and governance for advice licensees and financial planning practices of all sizes. There are many challenges to work through to make the industry thrive and achieve the goal of making financial advice affordable and accessible to Australians who need it most, and we feel we can add value as we progress through issues such as this one.

(b) What do you think are the impediments to the advice industry providing good-quality limited advice?

Lack of clarity from regulatory bodies is the biggest inhibitor. Often, guidance provided is subjective, leaving it up to Licensees/Advisers to set guidelines and parameters in order to mitigate their risk. Whilst this leaves room for some flexibility, it also opens up risk for businesses, who in turn may err on the side of caution, thus limiting their representatives further by putting in place restrictive policies.

With the myriad of changes that have taken place, particularly with the FoFA reforms which took effect from 1 July 2013 and more recently, the introduction of the FASEA Code of Ethics, many process and systems have changed, thus increasing costs to businesses.

With the introduction of the Best Interest Duty and related obligations, the 7 safe harbour steps, and more recently ASIC Report 515 and the FASEA Code of Ethics, the advice process has become more cumbersome and time consuming, thus increasing the cost of delivering advice. With cost to serve increasing, this has resulted in a higher cost of advice, which is passed onto the client.

In addition to the increased compliance obligations faced by licensees and advisers, consumers have little understanding of what is involved in receiving personal financial advice, and there is a negative perception about Financial Advisers – this is primarily due to the collapse of various financial advice businesses, which has resulted in significant financial losses to consumers, as well as the emotional impact it has had on them.

In addition, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (also known as the Banking Royal Commission and the Hayne Royal Commission), which commenced in late 2017 further affected the negative perception many consumers already have of Financial Advisers. Until consumers understand the role of a Financial Adviser, the processes they are obliged to follow and the positive result, good quality financial advice can have on people’s current and future financial needs, they will not see the value in advice, and therefore will not be willing to seek advice, nor pay for it.

(c) How do you think industry and ASIC should address these impediments?

More definitive clarity – guidance should be more black and white rather than grey. Also, guidance which is aligned across not just ASIC but FASEA, TPB, AUSTRAC etc. We see the creation of a Single Disciplinary Body (SDB) as a fantastic opportunity to centralise guidance with one set of policies and guidelines. Currently it is almost impossible to comply with contradictory guidance across the regulators themselves. We would also recommend that if the SDB is the central source of truth, that the government resource this significantly and spend 12-18 months getting all the policies right, with great consultation, as a starting point. For too long the advice industry has been reactive to industry issues and findings rather than being proactive and establishing an advice industry for the future.

Regular updates from ASIC would also be of great benefit and they can be delivered via technology. For example, Q&A sessions with ASIC on a quarterly basis. ASIC could also facilitate regular industry forums to collectively discuss ideas about hurdles, as well as ideas on how to overcome these with a greater focus on practical suggestions.

ASIC should promote togetherness rather than an “us” and “you” mentality. Advisers/Licensees have a perception that ASIC is always out to prosecute. Change this by facilitating regular forums in order for ASIC to hear it from the ground and better understand the issues that Licensee and Advisers face on a daily basis.

Through ASIC’s money smart website, consumers should be further educated about financial advice and the process an Adviser goes through in order to provide advice that’s in their best interest.

Interactive videos or podcasts could be developed where consumers share their positive stories, for example, situations where they suffered trauma, disability or prolonged illness and had the right insurances in place, and how this made a significant difference to their financial, emotional and mental wellbeing, and how it helped their family get through a very difficult period.

There are countless examples that can be shared. These types of stories resonate well with consumers as often they may have a similar family situation or be from a similar demographic and therefore will better realise the value financial advice could make to their situation.

QUESTIONS RELATED TO RG 244 (TABLE 5)

B2Q1 Questions about ASIC guidance on limited advice

(a) We are considering new formats for our guidance. What form of guidance would you find most useful for future ASIC guidance on limited advice? Some examples are listed below, please list in order of preference:

(i) updates to regulatory guidance; 4

(ii) podcasts and/or videos; 1

(iii) a dedicated advice guidance webpage on the ASIC website; 2

(iv) standalone examples on different topics; and/or 3

(v) other guidance (please describe). – Regular (e.g. quarterly) live Q&A forums with ASIC and industry participants (e.g. Compliance Managers, Licensee heads etc who can then communicate to Licensee staff/Advisers)

In addition to those areas listed by ASIC, we would like to see the practical side of limited advice fleshed out further. This could include, for example, a client file that includes a Fact Find, file notes, SOA and other related documents that steps out the steps an Adviser would take practically.

(b) Have you read RG 244?

Yes

(c) If you have read RG 244, did it help you to understand how to provide good quality limited advice? If not, how could the guidance be improved?

Whilst it is very helpful, it would be beneficial for the guidance to include interpretation from ASIC in terms of how they would view certain issues. For example, reference to how advice can be scaled up and down relies on an Advisers “judgement”.

RG 244.65 states Section 961B(2)(b)(i) of the safe harbour for meeting the best interests duty requires an advice provider to identify the subject matter of the advice that has been sought by the client (whether explicitly or implicitly). It is possible to limit the scope of advice within this subject matter to a single issue. Either you or your client can suggest limiting the subject matter of your advice. However, you must use your judgement when deciding on the scope of the advice. As an advice provider, you must determine the scope of advice in a way that is consistent with your client’s relevant circumstances and the subject matter of the advice they are seeking: see RG 175.265”

In addition, many examples centre around “Intrafund” advice, with call centre conversations used throughout the examples provided. Intra fund by virtue of its nature is limited, in that advice representatives are limited to certain advice topics and providing advice on a member’s interest in the super fund, so in essence they have certain boundaries already set for them.

On the other hand, Financial Advisers are not limited to such boundaries, so are left to determine their boundaries in terms of when they can provide scoped advice and often deal with situations that are more varied than those in a call centre environment. Many consumers see Advisers face to face and have a more personal relationship therefore examples should be more relevant and realistic.

(d) Are there any specific parts of RG 244 guidance that you do not understand? If so, which parts

RG 244.69-73 provides guidance on the level of enquiries required and how it can be adjusted to reflect the nature of the advice being sought. Specifically, RG 244.71 and RGG 244.72 state:

244.71 - You can adjust the level of inquiries to reflect the nature of the advice sought. This is recognised in a note to s961B(2), which states:

The matters that must be proved under subsection (2) relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that the inquiries made by the provider will be tailored to the advice sought.

244.72 - This means that the fact-finding process (i.e. inquiries into the client’s relevant circumstances) can be either limited or expanded, depending on the subject matter of the advice sought and the relevant circumstances. For example, when a client’s circumstances relevant to the subject matter of the advice are straightforward, the scale of your inquiries may be quite limited. As the complexity of a client’s circumstances relevant to the subject matter of the advice increases, you will generally need to expand the scale of your inquiries.

Whilst this guidance seems relatively clear, the introduction of the FASEA Code of ethics has created some confusion about how far reaching the requirement to investigate the clients “relevant circumstances” are. In particular, FASEA has made it clear that standard 2, which requires an Advice Provider to ‘act with integrity and in the best interests of each of your clients’ places greater obligation then section 961B of the Corporations Act. FASEA’s guidance issued in December 2019, states:

You act in a client’s best interests if what you do—the advice you give, the products and services you recommend—are appropriate to meet the client’s objectives, financial situation and needs, taking into account the client’s broader, long-term interests and likely future circumstances. The test is, in short: will your advice and recommendations improve the client’s financial well-being.

Section 961B of the Act imposes an obligation on persons who provide personal advice to a retail client to act in the best interests of the client in connection with the advice. That section, together with sections 961C, 961D and 961E, have the effect that the person satisfies the section 961B duty if the person:

·       identifies the retail client’s objectives, financial situation and needs, as disclosed to the person;

·       identifies and completes any reasonably apparent gaps in the information;

·       conducts a reasonable investigation of potential financial products; and

·       bases his or her judgements on the client’s relevant circumstances.

The ethical duty in Standard 2 to act with integrity is a broad ethical obligation. It is based on a more professional relationship between the relevant provider and the client, where the relevant provider has a duty to look more widely at what the client’s interests are.

This means that you will need to work out, and, if necessary, help the client to work out what the client’s objectives, financial situation, needs, interests (including long-term interests), current circumstances and likely future circumstances are. To comply with the ethical duty, it will not be enough for you to limit your inquiries to the information provided by the client; you will need to inquire more widely into the client’s circumstances.

The above guidance makes it clear that FASEAs expectations are more far reaching then the Corporations Act, so in the absence of guidance from ASIC on such issues, licensees and Advisers are left to decipher what is expected of them and how to meet both legal and ethical requirements.

(e) Is there other ASIC guidance on providing limited advice that would be useful? Please note the topics on which you think additional guidance would be useful.

A specific topic that we think needs standalone guidance in relation to this is insurance advice within super (and vice versa) as it relates to limited advice. For example, an adviser could follow all the correct process and scope insurance out of the engagement with the client, but when they recommend their superannuation fund, risk profiles etc, if they don’t consider insurance implications then the advice may not meet BID or the FASEA Code of Ethics.

Likewise, if an adviser recommends funding insurance via super and super is scoped out, to what extent can this be relied on in the event of a claim if the super fund becomes a poor-performing product?

Regardless of the topics, all guidance needs to be practical in its application rather than being based on theory alone.

(f) Given the issues you have identified in response to these questions, what do you see as potential solutions to help you provide good-quality limited advice?

ASIC guidance and FASEA guidance (along with other regulatory requirements, such as TPB) need to be consistent. Examples need to be realistic and relevant. ASIC needs to speak to Advisers and Licensees to understand the hurdles they face and the types of clients they deal with on a daily basis as well as typical scoped advice scenarios they deal with regularly.

(g) What do you see as the future challenges to providing good-quality limited advice? How do you think industry can best respond to and work through these challenges?

Consumer perception of what financial advice is. Many consumers may be unaware that they can obtain advice about single issues. Further, with the regulatory environment in constant change, licensees and financial advisers are constantly having to make changes to their process, thus increasing their costs, which flow onto clients. Advice continues to be unaffordable for lower-middle income earners which are likely to be more in need of advice then higher income earners.

The single biggest change to enable good quality advice would be to clearly separate product from non-product related advice. It would allow the industry to move on from many conflicts, minimise the cumbersome SOAs and enable planners to get back to what they do best, planning. Whilst there may be the ability to do this to a certain extent now, in reality the industry is afraid of getting it wrong and being subject to lookbacks and reviews and therefore licensees tend to err on the side of caution.

Enabling the provision and documentation of advice to be more aligned to technological developments (e.g., use of videos to provide advice, short form digital advice documents etc.) should also be considered to minimise costs of providing advice and making it more readily accessible.

B2Q2 Questions about examples in appendix to RG 244

(a) Are the examples of providing good-quality limited advice in the appendix to RG 244 helpful? If not, why not?

No – the majority of the examples (8 out of 14) are based on advice provided by a super fund (i.e. Intrafund advice). The reality is, Intrafund advice is already limited in terms of advice having to be in relation to member’s superannuation interest. The examples need to be relevant and realistic to all Financial Advisers, not just those with limited authorisation (such as Representatives who only provide Intrafund advice). ASIC should work with Adviser groups to understand common examples, for example, consumers wanting advice on life insurance only following the purchase of a home and subsequent debt. To be most effective, any examples provided should make reference to the FASEA Code of Ethics and how the actions exhibited in the examples meet the requirements of the Corporations Act as well as the standards.

(b) Should the examples in the appendix to RG 244 be expanded to include other topics? If so, which additional topics would you find helpful?

Yes. More examples should be provided in relation to advice given by a Financial Adviser. In particular, examples should include:

Insurance advice – it is very common for clients to see an Advisers for life insurance following a home purchase and therefore increase in debt. Many consumers are unaware of other personal insurances such as income protection and trauma cover. Whilst an Adviser may take the time to educate them on the importance of these other types of insurances, some clients will refuse to get advice outside of life insurance. Relevant and realistic example of different insurance scenarios should be included.

Review of their Super fund(s) – many clients have a limited understanding of how their superannuation works, as well as features and benefits in their super fund. Often consumers may question if they are in the right fund, or where they have multiple funds, they may want to consolidate. Often, this is the only area of advice they want addressed. In doing so, Advisers have a duty to bring to consumers attention, areas of advice they may not be aware of, such as the insurances within their fund, death benefit nominations, adequacy of their retirement benefits, etc.  Whilst some consumers may be open to expanding the area of advice, others will only want advice on a suitable fund. Where does the Adviser stand in relation to insurance held within the fund? Can this be scoped out? If so, whilst they may not assess suitability of levels of insurance, should they at a minimum recommend replacement cover? Is this sufficient in ASIC’s eyes? Is it sufficient when we look at the FASEA Code of Ethics guidance? Is it expected that the advice should be declined?

QUESTIONS ABOUT TERMINOLOGY (TABLE 6)

B3Q1 Questions about terminology in RG 244

(a) We would like your feedback on how we refer to the advice that we currently refer to as ‘scaled advice’ in RG 244. Do you think that any of the following terms would be easier to understand:

(i) limited advice;

(ii) narrow-scope advice;

(iii) piece-by-piece advice;

(iv) transactional advice; or

(v) episodic advice.

(b) Do you have any other suggestions for terminology we could use?

The above 2 highlighted – limited scope advice rather than just limited advice. We would also advocate the FPAs position that general advice should be relabelled “product information” as it’s not advice when you can’t offer an opinion.

EXAMPLE SOAS (RG90 AND RG244) – TABLE 7

B4Q1 Questions about ASIC guidance and examples on SOAs

(a) Are the model example SOAs in RG 90 and the appendix to RG 244 helpful? If not, why?

The model example in RG 90 is very good. It’s realistic and relevant and generally in line with what a “typical” SoA might look like.

The model example SoAs in the Appendix in RG 244 on the other hand are not realistic nor reflective of what a “typical” SoA would look like (rightly or wrongly). ASIC should undertake a review of what a “typical” SOA might look like and provide guidance on what is required and what isn’t and come up with a version that licensees would be more likely to adopt.

(b) We are planning to review and revise our guidance in RG 90. What changes to RG 90 would make it more useful?

The example SoA in RG 90 is quite good.

An SoA which includes replacement of product advice and how ASIC think the advice should be set out, in particular product replacement tables would also be of use.

As noted in Report 244 – Access to financial advice in Australia, Sixty-two percent of consumers have a preference for written advice that is not more than three pages in length. Long advice documents do not speak to consumers and are considered alienating (paragraph 63).

ASIC should look to come up with an SoA example that is realistic, relevant, simple to develop and easy for consumers to understand, whilst meeting all the regulatory obligations (across ASIC, FASEA etc).

(c) Is there any other guidance you would like on SOAs for limited advice?

If there is a requirement to include alternative strategies and/or products that were considered by the Advisers when developing their strategy.

Guidance on how to turn technical and complex strategies and disclosure into more user-friendly reading in order to enhance consumers understanding of not only the benefits, but the risks they need to be aware of. In particular, where areas are scoped out by the client, what are examples of disclosures ASIC would expect to see in SOAs? This would also be in line with Standards 4 and 7 of the FASEA Code of Ethics as they relate to informed consent.

AFFORDABIILITY OF ADVICE (TABLES 8 AND 9)

C1Q1 Questions about affordability and availability of advice

(a) What changes do you suggest to reduce the cost of personal advice for consumers?

We think having a SDB with a single set of rules across all regulators would be a great start. From there, we can look at potentially standardising some advice templates across the industry (not all, but the majority). This will dramatically improve the process, as customisation across ~2,500 licensees is making the process very cumbersome and easy to get wrong.

We have experienced and calculated that on average it takes an adviser 130 steps across 19 systems, with an average of 4 months delay to get from a referral, to SOA, to product completion. This is where the risk lies, not with the adviser.

In addition, financial advice should be a tax deductible expense. It is offered by registered tax financial advisers (with the TPB) and it is long past time where this should be achievable, regardless of the nexus to income.

(b) Do you think technology could be better used to reduce the cost of advice? Please explain your response.

Allowing advisers/licensees to better utilise technology to deliver advice in various forms (e.g. videos etc) should also be considered.

(f) Apart from the issue of cost, what changes do you think would improve the availability of personal advice for consumers?

Better understanding of what advice actually is and that consumers are able to receive limited advice to address specific issues they would like resolved. Consumers need to be better educated about what Financial Advisers do and how they can help them.

To see advice as a service which is in the public good. It's in no one’s interest to see the number of advisers decline from 28,000 to below 21,000 in 18 months as this decline further contributes to advice being even less affordable, as supply declines.

(g) What has your experience been with using ROAs? Have you found the COVID-19 relief helpful? Do you think relief should be provided to make ROAs more readily available for financial advisers to use as an alternative to an SOA?

Whilst the ROA relief during COVID-19 was helpful, it was only so in very limited circumstances. As mentioned previously, once you factor in BID and the FASEA Code requirements, most licensees/Advisers were not comfortable enough to utilise an ROA as they were concerned about the risk of getting it wrong.

It may be helpful to consider providing relief to utilising ROAs (instead of SOAs) in situations where the advice is in fact “limited” (without the need to meet current ROA requirements, e.g. no significant changes to the clients circumstances or the advice).

C1Q2 Questions about affordability and availability of advice

(f) Apart from the issue of cost, what changes do you think would improve the availability of personal advice to consumers?

Better understanding of what advice actually is and that consumers are able to receive limited advice to address specific issues they would like resolved. Consumers need to be better educated about what Financial Advisers do and how they can help them.

STRATEGIC ADVICE (TABLE 10)

C2Q1 Questions about strategic advice

(d) In your experience, which type of clients would benefit most from receiving strategic advice? Please explain your response.

Younger clients require advice on cashflow and budgeting. Many are often looking to purchase their first home or possibly an investment property. Strategic advice would be beneficial to consumers in this category.

Consumers who are approaching or planning for retirement also benefit from strategic advice.

Consumers who are already in retirement phase and do not have complex advice needs, could also benefit from ongoing strategic advice as a means to ‘check-in’ that the advice is still appropriate, without having to undertake a review of all the financial products.

(e) Do you think it would be helpful to provide more examples of compliant strategic advice in our guidance? If yes, what examples would you like to see?

Examples related to cashflow/budgeting. Also, in relation to aged care advice. Whilst Financial Advisers accept that they are unable to recommend whether a client sells their home in order to move into aged care, clients are often seeking advice about the different options available to them.

This is a growing area of advice, and Licensees have struggled to give definitive guidance on this issue as often, an Adviser doesn’t make a recommendation, but rather provides the client and their family with a range of options and the benefits of each in addition to the risks, considerations and disadvantages. It is then up to the client and their family to make decision about what to do. In the absence of a recommendation, guidance is needed on how this should be documented.

C4Q1 Other issues you wish to raise

If there are any other issues you wish to raise in relation to this consultation paper, please note them in response to this question.

Much is left up to Licensees when deciphering guidance issued by ASIC and other regulators. In many cases, the guidance from ASIC is seen to be grey and therefore Licensee are left to their own devices to interpret the guidance and put in place policies and process expected to be adhered to by their Authorised Representatives. In some cases, these may be more restrictive than ASIC’s guidance but this is often done to mitigate risk to the Licensee of incorrect interpretation and/or because the licensee has been subject to 515 and/or one of the lookback provisions.

There is also the disconnect between what ASIC expects to see from Licensees/Financial Advisers, and therefore develops it guidance with that lens, compared to the legal ramifications and action that can be taken against a licensee/financial adviser. That is, in most circumstances, Licensees go above and beyond what is in ASIC’s guidance to mitigate against legal action.

More definitive and practical guidance should be issued by ASIC that is in line with both the Corporations Act and the FASEA Code of Ethics.